Stock markets tend to overreact when times are bad and come back slower when the storm is over. These two phenomena are caused, among other things, by fear and painful memory of the recent loss. Following are three companies which were oversold in the recent financial fiasco and are still facing pressure. Once the economic picture stabilizes, they should rebound, since these three companies are established leaders in their fields. Finally, the fourth investment idea is a merger-arbitrage investment which offers uncorrelated market return.
Bank of America (BAC) is trading at around $6.70, still hovering around the low end of its 52-week range ($4.91 to $15.31). The acquisition of Merrill Lynch at bottom-low prices during the recent financial crisis has allowed the bank to offer wealth management services by one of the best known investment names. At the same time, it has managed to resolve significant issues with Countrywide, and the largest losses and legal liabilities related to this acquisition are behind the company.
BAC earned $6.2 billion or $0.56 per share in the third quarter of 2011, and finished with $2.22 trillion in assets. From a valuation standpoint, Bank of America trades at a discount compared to other companies in the banking industry and the financial sector. Its price to book value is at 0.3%, significantly lower than the banking industry price to book value ratio of 1.2 and than the Standard and Poor's 500 average price to book value ratio of about 4. Right now, BAC is a good buy.
Ford Motor (F) did not receive government bailout funds, and has also benefited from supply disruptions at Toyota (TM) after the devastating earthquake and tsunami in Japan. F trades at around $12 a share, its price to earnings ratio is 7, and it pays a dividend of $0.20 per year for a yield of about 1.67%. During the third quarter of 2011, Ford earned $0.41 a share on sales of $33 billion, when I noted that it could see some significant upside in 2012 since shares were cheap.
The company should continue its healthy recovery as demand for cars improves in 2012, its recent efficiency efforts start to bear fruit, capacity utilization continues to increase, and as F introduces new models in the U.S. and abroad. For the trailing 12 months Ford generated positive cash flow from operations and its price to cash flow ratio is around 5, lower than that of the average car manufacturer and the Standard and Poor's average price to cash flow ratio of over 7.
Ford sales are well diversified around the world. Sales in North America were $18 billion in the latest quarter or 55% of sales, followed by European sales of $7.8 billion or about 24%, South America with $3 billion in sales or about 9%, and $2.3 billion or 7% coming from Asia Pacific Africa. Sales amounts exclude a joint venture in China and Ford Motor Credit Company, which alone generated $581 million of operating income in the third quarter of 2011. In conclusion, Ford is well prepared to meet expected increase in future demand for cars in the U.S. and globally and with a stable 1.67% dividend yield the shares offer an attractive payout and a potential for capital appreciation as the market brings Ford's valuation up to its peers. Buy.
Lloyds Banking Group PLC (LYG) is a good buying opportunity trading near its 52-week price low. Lloyds operates globally but primarily under the Lloyds and Halifax names in England and Wales and Bank of Scotland in Scotland and owns the Scottish Widows, which is well known around the world as one of the largest pension and investment service providers in Europe. At current price levels investors are buying LYG shares at bottom-low prices to gain exposure to one of the most dynamic economies in the world. LYG shares recently traded around $1.75 (the 52 week trading range is $1.33 to $4.48) on the New York Stock Exchange and its price to book value ratio of about 0.4 is favorable compared to the Standard and Poor's 500 average price to book value ratio of about 4.
Lloyds received bailout funds during the financial crisis and still owes about $57.5 billion to the government and central bank of England. Lloyds is currently trying to reduce its risk exposure and non-core assets. LYG sold its United Arab Emirates operation in December of 2011 which is a step toward this goal. The company finished the third quarter of 2011 with a number of improvements including a reduction of its operating expenses by 3%, reduction of its non-core assets by $17 billion for the quarter and by $65 billion year to date, customer deposits increased 4% for the first nine months of 2011, and its impairment charge declined 22% since the beginning of the year.
While LYG is experiencing difficulties, it will survive the current turmoil and continue to maintain its leadership position in financial services in England, Wales and Scotland. Lloyds is currently executing a plan to cut costs (the CEO has reportedly waived his 2011 bonus), streamline operations and reduce risk. Once there is a sign that it is returning to stable profitability and dividend payout the stock will rise.
Inhibitex (INHX) trades at around $24.85. On January 7, 2012, INHX announced that it would be acquired by Bristol-Myers Squibb (BMY) for $26.00 per share or a total purchase price of about $2.5 billion. Inhibitex traded from $2.15 to $24.85 in the past 52 weeks and the acquisition price of $26.00 per share is at a 163% premium to INHX closing price of $9.89 per share on January 6, 2012, the day before the offer was made public. If an investor buys and holds INHX until the acquisition is complete, in about two and a half months, this will generate a profit of $1.15 or 4.6%. The annualized non-market correlated profit is about 24%. The acquisition has been approved already by the board of directors of both companies and is expected to receive regulatory and Inhibitex shareholder approvals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.